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AMFI MUTUAL FUND

(ADVISOR) JUNE 2007Training Module

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1. The Concept and Role of Mutual Funds.

2. Funds Structure and Constituents.

3. Legal and Regulatory Framework.

4. The Offer Document.5. Fund Distribution and Sales Practices.

6. Accounting, Valuation & Taxation.

7. Investor Services.

8. Investment Management.

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09. Measuring and Evaluating Mutual Fund Performance.

10. Helping Investors with financial planning.

11. Recommending Financial Planning Strategies to Investors.

12. Selecting the right Investment Products for Investors.

13. Helping Investors understand Risks in Fund Investing.

14. Recommending Model Portfolios and selecting the right Fund.

15. Business Ethics in Mutual Fund.

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Concept and Role

Of Mutual Funds

Chapter 1

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What is a Mutual Fund ?

It is a pool of money, collected from investors, and is investedaccording to certain investment objectives

The ownership of the fund is thus joint or mutual, the fundbelongs to all investors.

A mutual funds business is to invest the funds thuscollected, according to the the wishes of the investors whocreated the pool

An equity fund will invest in Equity shares, PreferenceShares , Warrants etc.A Debt Fund will invest in Debt Instruments only.

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Important characteristics of a Mutual Fund?

The ownership is in the hands of the investors who have pooled intheir funds.

It is managed by a team of investment professionals and otherservice providers.

The pool of funds is invested in a portfolio of marketable investments.

The investors share is denominated by units whose value is calledas Net Asset Value (NAV) which changes everyday.

The investment portfolio is created according to the stated investmentobjectives of the fund.

Mutual Funds are also known as Financial Intermediaries In India, Mutual Funds are constituted as TRUSTS.

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Advantages of Mutual Funds to Investors?

Portfolio diversification Professional Management Reduction in Risk Reduction in Transaction costs Liquidity

Convenience and Flexibility Safety Well regulated by SEBI

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What are the disadvantages of investingthrough Mutual Funds?

No control over the costs. Regulators limit theexpenses of Mutual Funds. Fees are paid as percentageof the value of investment.

No tailor made portfolios.

Managing a portfolio of funds. ( Investor has to hold aportfolio for funds for different objectives ).

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Evolution of Mutual Funds in India

Phase I ( 1964 1987)- Growth of UTIUTI sole player in the industry, created by an Act of Parliament ,1963UTI launches first product Unit Scheme 1964UTI creates products such as MIP's, children plans ,offshore funds etcMASTERSHARE Ist Diversified Equity Investment Scheme in India.

INDIA Fund Ist indian offshore fund lauched in August 1996.

Phase 2 ( 1987 1993)- Entry of Public Sector FundsIn 1987 Public Sector Banks and FI's got permission to set up MF.SBI mutual fund was the first non -UTI mutual fund

In 1993, Mutual Fund Industry was open to private players.SEBI got its regulatory powers in 1992

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Phase 3 ( 1993-1996) Emergence of Private FundsIn 1993, Mutual Fund Industry was open to private players.SEBI's first set of regulations for the industry formulated in 1993Significant innovations, mostly initiated by private players

Phase 4 ( 1996-1999) Growth and SEBI RegulationImplementation of new SEBI regulations led to rapid growthBank mutual funds were recast as per SEBI guidelinesUTI came under voluntary SEBI supervision.Dividends made tax free in 1999.Mutual funds assets in mid-2002 were appx. 1,00,000 crores

AUM by end of 2004 appx. INR 153,000 croresDuring this phase, both SEBI and AMFI launched investor awarenessprogrammes.

AMFI also pubished a a booklet titled Making Mutual Funds work for you

The investors Guide

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Phase 5 (1999-2004) Emergence of a large and

uniform industry

Uti Act Repealed in February 2003.

UTI mutual fund came under SEBIs regulations1996.

Rapid growth, significant increase in corpus of private playersTax break offered created arbitrage opportunitiesBond funds and liquid funds registered highest growth

Phase 6 From 2004 onwards : Consolidation andGrowth

Mergers and Acquisitions witnessedAlliance MF acquired by Birla Sunlife

Sun F&C by Principal PNB Mutual fund.

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Emergence of Large and Uniform Industry

UTI Act repealed in 2003.

UTI now does not have a special status.( now underSEBI)

Size of industry was 150000

crore in 200

5. Merger and Acquisitions happening.

Fidelity, Largest MF has entered.

As on March 2006- 29 Funds.

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Mutual Fund Classifications

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What are open-ended funds?

In an open ended fund, investors can buy and sell units ofthe fund, at NAV related prices, at any time, directly fromthe fund.

Open ended scheme are offered for sale at a pre-

specified price, say Rs. 10, in the initial offer period. After apre-specified period say 30 days, the fund is declared openfor further sales and repurchases

Investors receive account statements of their holdings,

The number of outstanding units goes up and down The unit capital is not fixed but variable.

the corpus of an Open-ended scheme changes everyday

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What are closed end funds?

A closed -end fund is open for sale to investors for aspecified period, after which further sales are closed.

Any further transactions happen in the secondary marketwhere closed-end funds are listed.

The price at which the units are sold or redeemed dependson the market prices, which are fundamentally linked to theNAV.

The corpus of closed ended funds remains unchanged.The unit capital is fixed, one time sale.

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Load and No Load Funds

Load is the one time fee payable by the investor to allowthe fund to meet initial issue expenses includingbrokers/agents/distributors commissions, advertisingand marketing expenses.

Funds that charge front end( entry) load, back end( exit),or deferred loads are called LOAD funds.

IF the investors objective is to get the benefit of

compounding his initial investment by reinvesting andholding his investment for a very long term, then , a nofront load fund is preferable.

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Tax Exempt Vs. Non Tax Exempt Funds

When a fund invests in tax exempt securities, it is calleda tax exempt fund.

In India any income received by mutual fund is tax free.

After 1999 budget, all dividend income received fromMF is tax free in hands of the investor. But all fundsother than open ended equity funds have to pay adividend distribution tax.

So in india, open end equity oriented mutual fundschemes are tax exempt investment avenue, while otherfunds are taxable for distributable income.

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Types of Funds - By InvestmentObjective

Equity Debt Money Market

Equity FundsIndex Funds

Sector Funds

Fixed IncomeFunds

GILT Funds

Money MarketMutual Funds

Balanced Funds Liquid Funds

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What are equity funds?

Predominantly invest in equity shares of the company.Choices in equity funds.

Aggressive Growth Funds Growth Funds Specialty Funds

Sector Funds Foreign Securities Fund ( investment in shares of

different countries to make it more diversified) Mid cap or Small cap Equity funds Option Income Funds

Diversified Equity FundsEquity Index FundsValue FundsEquity Income or Dividend yield funds

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What are liquid and money market

funds? These debt funds invest only in instruments with

maturities less than a year.

The investment portfolio is very liquid and enables

investors to hold their investments for very short

horizons of a day or more.

What are Gilt Funds?

It invests only in securities that are issued by the Government and therefore donot carry any credit risk

Government papers are called as dated securities also.

It invests in both long-term and short-term government papers. Ideal for institutional investors who have to invest in Govt. Securities Enables retail Participation

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ELSS ( Equity linked saving scheme )

3 year lock in period

Minimum investment of90% in equity markets at alltimes

So ELSS investment automatically leads to investment

in equity shares.

Open or closed ended.

Eligible under Section 80 C upto Rs.1 lakh allowed

Dividends are tax free.

Benefit of Long term Capital gain taxation.

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Fixed Term Plan Series-

FTPs are closed ended in nature.

AMC issues a fixed number of units for each series onlyonce and closes the issue after an initial offering period.

Fixed Term plan are usually for shorter term less thana year.

They are not listed on a stock exchange.

FTP series are likely to be an Income scheme.

Good alternate of Bank deposits/ corporate deposits.

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How are funds different in terms of their risk

profile?

uit unds Hih le el of eturn uthas a hi h le el of risk too

e t unds eturns omparati el less risk than e uit funds

i uid and one

arket unds Pro ide sta le ut low le el of return

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Important points

IN USA, a MF is constituted as an investment companyand an investor buys the share of the fund.

In USA, all mutual funds are open ended.

In USA, funds are also classified as Tax Exempt and

Non Tax Exempt Funds

In India, classified as Open Closed ended, Load andNo Load Funds.

Mutual Fund is NOT a company, it can be called as aportfolio of stocks, bonds and other securites or it can becalled as pool of funds used to purchase securities onbehalf of investors or a collective investment vehicle.

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Very Important Points to Remember

An Open Ended Fund offers repurchase facility unconditionally at alltimes.( But It is not obliged to keep selling new units at all times.)

A Gilt Fund is a special type of Fund that invests in Dated Securitiesonly.

Units from an Open ended fund are bought from Agenciesappointed by AMC ( Distributors, Banks, Post offices, brokers etc.)

The Unit Capital of a closed Ended Fund is fixed. Also the numberof units are also fixed.

Each unit holder of a mutual Fund is part owner of the asset of thatMutual fund ( he is not a creditor, not a debtor and not a trustee of

that mutual fund). Units from an Open Ended fund are bought from the Fund Itself

( not from the amfi, stock exchange, distributors or the banks).

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Chapter 2

Fund Structure andConstituents

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How does a Mutual Fund work?

SEBI

AMC

Unit holders

Savings

Units

Trust Investments

Returns

Trust

AMCCustodian

Registrar

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Unit Trusts Constituents

Fund Sponsor.

Mutual Fund as Trust.

Asset Management Company.

Other fund constituents. Custodian and Depositories. Bankers.

Transfer Agent. Distributors.

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What is the regulatory structure of MF in India?

The structure of mutual funds in India is governedby SEBI(Mutual Fund)Regulations, 1996.

It is mandatory to have a three tier structure of

Sponsor-Trustee-Asset Management Company.

The Sponsor is the promoter and he appoints theTrustees who are responsible to the investors of thefund.

AMC is the business face of the mutual fund as itmanages all the affairs of the fund

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Who can be the Sponsor? What does the Sponsor do?

The sponsor establishes the mutual fund and registers

the same with SEBI Sponsor appoints the Trustees, custodians and the AMC

with prior approval of SEBI and in accordance with SEBIRegulations

Sponsor must have a 5-year track record of businessinterest in the financial markets

Sponsor must have been profit making in at least 3 of theabove 5 years.

Sponsor must contribute at least 40% of the net worth ofthe AMC

Sponsor could be a bank (SBI, PNB, ICICI) a financial institution (Fidelity,Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)

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How are Mutual Funds Structured?

In India Mutual fund is the form of a Public Trust createdunder the Indian trust Act. 1882. The fund sponsor acts as the Settler of trust, contributes

the initial capital and appoints the trustees to hold thetrust for the benefit of the unit holders.

In India, Mutual funds are organized as trusts. The trust iseither managed by a Board of Trustees, or by a trusteecompany.

Th

e trusteesh

old th

e unith

olders money in afiduciary capacity.(Money belongs to unit holders)

In legal sense, the investors are the beneficial owners

of investments.

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There must be at least 4 members in the Board ofTrustees and at least 2/3 of the members of the board oftrustees must be independent.

Trustee of one mutual fund can not be a trustee of

another mutual fund.

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What are the rights of the Trustees?

Trustees appoint the AMC, in consultation with thesponsor and according to SEBI Regulations

All Mutual Fund Schemes floated by the AMC have to beapproved by the Trustees

Trustees can seek information from the AMC regardingthe Operations and compliance of the mutual fund.

Trustees can seek remedial actions from AMC, and in

cases dismiss the AMC Trustees review and ensure that net worth of the AMC is

according to stipulated norms, every quarter

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What are the obligations of the Trustees?

Trustees must ensure that the transactions of the mutual

fund are in accordance with the trust deed

Trustees must ensure that the AMC has systems andprocedures in place, and that all the fund constituents areappointed

Trustees must ensure due diligence on the part of AMC inthe appointment of constituents and business associates

Trustees must furnish to the SEBI, on half yearly basis a

report on the activities of the AMC Trustees must ensure compliance with SEBI regulations

The board of trustees are required to meet at least 4 times in a year to reviewthe AMC

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Regulatory requirements for the AMC?

Only SEBI registered AMC can be appointed as investment

managers of mutual funds

AMC must have a minimum net worth of Rs. 10 Cr., at all

times

An AMC cannot be an AMC or Trustee, of another Mutual Fund

AMC s cannot indulge in any other business, other than thatof asset management

At least half of the members of the Board of an AMC, have tobe independent

The 4th Schedule of SEBI regulations spells out rights andobligations of both trustees and AMCs

The agreement between the Trustees and the AMC is

known as Investment Management Agreement.

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Who appoints the AMC and defines its functions?

The trustees, on the advice of the sponsors usuallyappoint the AMC

The AMC is usually a private limited co., in which thesponsors and their associates or JV partners ,are

shareholders

The AMC has to be a SEBI registered entity, with aminimum net worth of Rs. 10 Cr.

The trustees sign an investment management agreementwith the AMC, which spells out the functions of the AMC

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How are Indian mutual funds organised?

Though the trust is the mutual fund, the AMC is itsoperational face

The AMC is the first functionary to be appointed and isinvolved in the appointment of all other functionaries

The AMC structures the mutual fund products, marketsthem and mobilises the funds, manages the funds andservices the investors

All the functionaries are required to report to the trusteeswho lay down the ground rules and monitor their working

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What are the restrictions on the AMC ?

AMC s cannot launch a scheme without the prior approvalof the trustees

AMC s have to provide full details of investments byemployees and Board members in all cases where theinvestment exceeds Rs.1 Lakh

AMC s cannot take up any activity that is in conflict withthe activities of the mutual fund

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What do the Registrar and Transfer Agents do?

They are responsible for investor servicing functions Process investor applications

Record details of Investors

Send information to Investors

Process dividend payout

Incorporate changes in investor information

Keeping Investor information up to date

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What is the role of Brokers in a mutual fund?

Enable investment managers to buy sell securities

Brokers are registered members of the stock exchange

They charge a commission for their services.

In some cases provide investment managers withresearch reports

Act as an important source of market information.

Limit of 5% per broker

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What is the role of selling and distributionagents ?

Selling agents bring investors funds for a commission

Distributors appoint agents and other mechanisms tomobilize funds from investors

Banks and post offices also act as distributors

The commission received by the distributors is split intoinitial ( Upfront) commission which is paid on mobilization

of funds and trail commission which is paid depending onthe time the investor stays with the fund

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What are the functions of the custodians ?

Responsible for the securities held in the mutual fundsportfolio

Keep an investment record of the mutual fund

Collect dividends and investment payments due on the

mutual funds investment

Track corporate actions like bonus issues, right offers, offerfor sale, buy back and open offers for acquisition

The custodian and sponsor cannot be the same entity

The custodian is the guardian of the funds and assets of investors

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Various Forms of Fund Mergers and Takeovers

Merger of AMC to become a single entity( Example : HB Mutual and Taurus Mutual )

AMC takeover by sponsors ( Example : ITCThreadneedle and 20th century taken over by Zurich)

( ITI by Franklin Templeton)

Scheme take over (Apples scheme taken over by BirlaAMC ) and ( Zurichs Scheme Takeover by HDFC

Mutual Fund)

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What are the conditions under which two AMCscan be merged?

SEBI regulations require the following :

SEBI and Trustees of both funds must approve of the

merger

Unit holders should be notified of the merger, and

provided the option to exit at NAV, without load ( in case

of open ended funds else 75% consent is required)

High Court approval is required as AMCs are companies.

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Under what conditions can an AMC betaken over by another sponsor ?

SEBI approval is required of the change of ownership andunit holders have to be informed of the takeover

Investors have to be informed but HIGH Court

approval not required

What is scheme take over?

If an existing mutual fund scheme is taken over by anotherAMC, it is called as scheme take over. The two mutual

funds continue to exist.Trustee and SEBI approval andnotification of unit holders are required for schemetakeovers

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Important oints

In USA, the regulatory body is known as SecuritiesExchange Commission.

The sponsor may be compared to promoter of acompany

Issuing units and redeeming units is the role of TransferAgent

The appointment of AMC can be terminated by Majorityof directors of trustees.

Fund manager is responsible for filing details of thefunds portfolio with SEBI.

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A sponsor of a mutual fund can act as the distributor ofthe Mutual fund.

Sponsor can contribute to the initial corpus of the trust.

Sponsor can contribute to the capital of the AMC.

Sponsor can invest in his own funds schemes.

Sponsor can not act as Trustee of Mutual fund.

Sponsor can not act as Custodian of the Mutual

Fund

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Legal and Regulatory Framework

Chapter 3

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Regulating Agencies of Mutual Fund

SEBI ( Established in 1992 by an act of parliament)

Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 199

6 SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign

country

Bank-sponsored mutual funds are jointly regulated by SEBI and RBI

SEBI and RBI are under the purview of Ministry of Finance

RBI regulates the money and government securities market where the mutual funds

invest Liquid funds which invest in money market instruments are now governed by

SEBI alone. ( Money Market Mutual Funds are now regulated by SEBI)

If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission

All schemes of UTI are now under UTIMF, are managed by a UTI AMC and underpurview of the SEBI

Sebi regulates Share Registrars, Custodians, Mutual Funds, Stock Exchanges

and share brokers. But it does not regulate Non Banking Finance companies.

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What is the regulatory jurisdiction of RBI

over mutual funds ?

RBI is the monetary authority and the regulator of thebanking system

Bank sponsored mutual funds were under the dual control

of RBI and SEBI

Presently RBI is only the regulator of the sponsors of banksponsored mutual funds. SEBI is the regulator of all mutualfunds

Mutual funds are affected by the RBI stipulations onstructure, issuance, pricing & trading of Govt. Securities

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What is the role of Ministry of Finance in

mutual fund regulations ?

The finance ministry is the supervisor of both the RBIand SEBI

Aggrieved parties can make appeals to the MoF on theSEBI rulings relating to mutual funds

AMCs has to file its annual statements with Registrar ofCompanies ( RoC)

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What are self regulatory organisations (SROs)?

Stock exchanges are Self-Regulatory Organizations(SROs)

SROs are the second-tier in the regulatory structure

SROs get their powers from the apex regulating agencyand act on their instructions

SROs cannot do legislation of their own

SROs regulate only their own members in limitedmanner

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What are the objectives of AMFI ?

AMFI is an industry association, incorporated in 1995, isnot an SRO, so it can just issue guidelines to members. Itcannot enforce regulations.

Objectives

To promote the interests of mutual funds and unit holders.

To set ethical, commercial and professional standards inthe industry.

To increase public awareness of the mutual fund industry.

To develop a cadre of well trained distributors

AMFI is governed by a board of directors elected frommutual funds and is headed by a full time chairman.

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What are the rights of the investors in respect of

service standards that they can expect from MFs?1. Investors are entitled to receive dividends declared in a scheme within 30 days

2. Redemption proceeds have to be sent to investors within 10 days3. If an investor fails to claim the dividend or redemption proceeds he has the

rights to claim it up to a period of 3 years from the due date at the then

prevailing NAV. After 3 years he will be paid at NAV applicable at the end of

3rd year

4. Mutual funds have to allot units within 30 days of the IPO an dalso open the

scheme for redemption, if it is an open -ended scheme5. Mutual funds have to publish their half yearly results in at least one national daily

and publish their entire portfolios, at least once in 6 months . Such disclosure should

be done within 30 days from 6 monthly account closing dates of the fund

6. Trustees will have to ensure that any information having a material impact on the

unit holders investments should be made publicby the mututal fund

7. If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of

unit holders can be called 3)Appointment of the AMC of the mutual fund can be

terminated

8. If there is any change in the fundamental attributes of the scheme, the unit

holders have to be notified through a letter. They also have a right to

repurchase at NAV without any load, before such change is effected.9. Unit holders have the right to inspect certain documents

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What are the limitations to investors right ?

Investors cannot sue the trust as they are not distinct fromthe trust

Investors cannot lodge complaints against thetrustees (with the Registrar of Public Trusts) or theAMC (with the CLB).

Investors can lodge complaints with SEBI for non-compliance.

Investors cannot be compensated if the performanceof the fund is below expectations.

There are not legal remedies for to a prospectiveinvestor

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Important oints

Sebi does entertain complaints against MF and intervenes withfund managements to help the investor.

Sebi requires that sponsors of a new scheme should appoint acompliance officer who must issue a Due Diligence Certificate tothe effect that all regulations have been complied with by the fund

and sponsors.

Unitholders have right to timely service, right to information, right toapprove changes in fundamental attributes, right to wind up ascheme, right to terminate the AMC.

IIIrd Schedule of SEBI (MF) regulations 1996 specifies the contentsof the Trust Deed.

The body to which investors may address their complaints is SEBI.

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Offer Document

Chapter 4

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Offer Document is the most important source of information about amutual fund scheme for investors

An abridged (summary) version of the OD is Key InformationMemorandum (KIM)

Investors are required to read and understand the OD

Investors sign the form stating that they have read the OD. Norecourse is available to investors for not reading the OD or KIM

The cover page of OD contains details of scheme being offered, thename of the sponsor, trustee, AMC etc

Mandatory disclaimer clause of SEBI should also be on the coverpage of the OD

The format and contents of the OD must be as per SEBI guidelines

The OD is issued by the AMC on behalf of the trustees

The AMC is responsible for the information in the OD

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Close-ended funds issue an OD at the time of the I O

Open-ended funds have to update OD at least once in 2 years

Trustees approve the contents of the OD and KIM

KIM is compulsorily made available with every application form

SEBI does not approve or certify the contents of the OD

Investors rights are stated in the OD

The OD contains detailed info, while KIM is the summary document

If any information is crucial to the investor, it will be found in

both OD and KIM. For eg. details of guarantee, if the scheme is

an assured return scheme

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the OD must contain a due diligence certificate signed by a complianceofficer, an AMC employee

The due diligence certificate states that:

- Information in the OD is according to SEBI formats

- Information is verified and is true and a fair representation of facts

- All constituents of the fund are SEBI registered

The following information would be available in the OD:

Category of Investors eligible to apply, viz. Individual, HUF, FI, Trust,Society, Corporate, Association of Persons, NRI, PIO, OCB etc

Information on existing schemes and financial summary to begiven for 3 years

Information on transactions with associate companies to beprovided for past 3 years

If any expense incurred in a past scheme is higher than what wasstated in OD, explanations should be given

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Investors rights are stated in the OD

3 year track record of investors complaints and redressalshould be disclosed

Any pending cases or penalties against sponsor or AMC

The borrowing restrictions on the mutual fund should bedisclosed, including the purpose and limit of borrowings

In case of a guaranteed scheme, name of guarantor, their

net worth

and past performance of assured return sch

emes The name and addresses of trustee and AMC directors will be

found in KIM, but the details of their role, responsibilities and dutieswill be found in OD

There is no information about other mutual funds, theirperformance in the OD. No comparison or data on performanceof other mutual funds is found in OD

The OD and KIM will not contain names of securities in which thefund plans to invest, only broad asset allocation will be given.

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Fundamental attributes of a scheme are its basicfeatures. For eg. open or close ended, lock-in period,fund objectives, asset allocation, loads and charges etc.

For any change in fundamental attributes, SEBI andTrustee approval is required.

Investor approval is not needed. However, each investormust be informed through a communication and given

the option to exit without exit load.

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What are the mandatory disclosures to be made

on the cover page ( Front age) of the OD?

Name of the mutual fund.

Name of the scheme.

Type of scheme.

Major Objective

Name of the AMC.

Classes of units offered for sale.

Price of units plus applicable load.

Name of the guarantor in case of assured return

schemes.

Opening , closing and earliest closing date of offer.

Mandatory statements.

Date of its publications.

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What are the standard risk factors?

Mutual fund and securities are subject to market risk andthere is no assurance that the objective will be achieved

NAV of units issued under the scheme can go up or down

depending on factors and forces affecting capital markets.

Past performance of the sponsor/AMC/ Mutual fund doesnot indicate the future performance of the scheme.

The name of the scheme does not in any manner indicate

any either the quality of the scheme or the future

performance of the scheme

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What are scheme specific risks?

Risk arising from investment objective, investmentstrategy and asset allocation of the scheme

Risk arising from non diversification , if any

If a scheme offers assured returns, the scheme must statethat the assurance is on the basis of the guaranteesprovided by the sponsor/AMC

If the AMC has no previous experience in managing a

mutual fund, a disclosure to the at effect should be made

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Important oints regarding OD and KIM

In USA, the OD is known as prospectus The first time investor should read detailed offer

document, once he has gained familiarity with the AMC,he can just refer to KIM

The OD do not contain the address of the Trustees ofMF

The offer document is issued by the AMC / Trustees

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Index

Important Points

KIM is available at various distribution points such as banks,distributors and brokers

AMC must confirm that a due diligence certificate signed byComplicance officer / CEO / MD has been submitted to SEBI.

If a schemes name implies that it will invest primarily in a particulartype of security or in certain industry, then it will invest atleast 65%of the value of its assets in the indicated type of security/ industry.

The OD must disclose minumum amount to be raised as per SEBI

Regulations, and the maximum target amount in case of assuredreturn schemes.

OD must contain brief description of investors complaint history forthe last 3 Fiscal years of existing schemes.

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Index

Chapter 5

Fund distribution and Sales

Practices

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What are the categories of investors eligible to

buy MF units?

Resident Individuals Indian Companies

Indian trusts and charitable institutions

Banks

NBFCs Insurance companies

Provident funds

Non-resident Indians / PIO

OCBs SEBI registered FIIs

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Important point

Distributor should look up the offer document to see which categoryof investors are allowed to invest in any particular scheme of thefund, as it is possible that some categories are not allowed to investin some schemes.

For example, charitable trusts are not allowed to invest in somecategory of schemes in some funds. So in this case distributorshould refer offer document.

Any investor who becomes a foreign citizen after investing in afund, has to compulsorily redeem the units after obtaining foreigncitizenship

FIIs can invest in Mutual Funds through their Non Resident RupeeAccount

RBI has granted a blanket permission to NRI, OCB and FIIs; everyinvestment does not require RBI approval.

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Distribution Channels

Individual Agents- A person has to sign an agreement with a fundon non judicial stamp paper. He has to be AMFI certified also to sellMutual Fund products.

Only exemption is distributors abvoe 50 years of age and with atleast 5 years of experience as on Sep 30, 2003. Such exempteddistributors were required to complete AMFIs refresher course bySep 30, 2004.

UTI MF requires its agents to have atleast passed the level ofmatriculation and also to provide 2 references.

Distribution Companies

Banks and NBFCs

Post Offices

Direct Marketing- CURRENTLY 49837 are amfi certified and 30028 have

taken the ARN numbers ( as on 31/3/2005)

Wh t th AMFI d d b t

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What are the AMFI recommended best

practices for mutual fund agents?

1. Agents m st be fully aware and informed about the features of the

products that they offer to the investors

2.Agents should be highly familiar with the profile of the investors, in terms

of return expectations, requirements and risk tolerance

3. Agents must strive to cultivate disciplined approach to investing and a

regular investment habit among clients

4. Agents must have a thorough understanding of the needs of their

investors

5. Agents must be able to help investors to choose from alterntative

investment products, and enable an appropriate asset allocation

6. Agents should seek from investors the commitment to invest to enable

which they may assist the client with the forms and procedures for

investing

Wh t i SEBI d ti i d ?

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What is SEBIs advertising code?4.Annualised yield should be shown for 1,3,5 years and since launch of

the scheme. For funds with less than 1 year performance can be in

terms of total returns.

5.Appropriate benchmarks and identical time period must be used

while comparing. Once chosen the benchmark should be used

consistently over time.

6. All advertisements should in the main body of the adevertisementimmediately after the return/yields and in the same font mention that

past performance may or may not be sustained in future

7. Where any ranking is used such ranking should be appropriately

mentioned.

No Celebrities shall form part of advertisement.

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What is the AMFI Code of Ethics?

Management of the fund ought to be in the interest of unit

holders High standards of service are expected from the fund.

Adequate disclosures by the funds ought to be made to theunit holders and trustees.

Funds are urged to adopt the use of professional sellingpractices.

Management of funds collected has to be in accordance withstated investment objective

Funds should avoid conflicts of interest in dealings bydirectors, officers and employees.

Funds have to refrain from unethical market practices.

Wh t i th i i t t f t l f d

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What is the commission structure for mutual fundagents?

The commission consists of two components

Initial ( Upfront )commission - Paid as a fixed percentage ofamount mobilised by agents

Trail commission - it is paid periodically on the funds that

remain invested in the scheme. Trail is an effective way torestrict the practice of rebating, and link commissions

The rates of commission are decided by the mutual fund

themselves and are not subject to regulation by either AMFIor SEBI.

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Fundamental Attributes of a Scheme

Type of Scheme, Investment Objective and Terms of the

issue, Investment Pattern, Fees and Expenses,Valuation norms and Investment Restrictions.

Any change in Fundamental Attributes, Trust, Fees andexpenses payable and other changes which affect unitholders interest have to be informed to investors eitherin writing or newspaper advertisement( one in Englishdaily and other in a paper published in the language ofthe region where the HO of a MF is s i tuated)

The unit holders are given option to redeem their

holdings in the fund without any exit if anything in aboveis changed.

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Loads

Load is charged to investor when the investor buys or redeems units. It

is primarily used to meet th

e expenses related to sale and distributionof units

Load charged on sale of units is entry load. It increases the price above theNAV for new investor.

Load charged on redemption is exit load. It reduces price.

Maximum Entry load or Exit load is 7%.( For Open ended Funds)

Max. Entry or Exit load for closed ended funds is 5%

CDSC is Contingent Deferred Sales Charges.

CDSC is an exit load that varies withholding period. It is less forinvestors who stays longer in the fund.

Load is an amount which is recovered from the investor.

A No load Fund is one in which the Initial issue expenses are notcharged to the investors.

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Chapter 6

Accounting Valuation and Taxation

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Index

What are net assets of a mutual fund ?

The net assets represent the market value of assets whichbelong to the investors, on a given date.

Net assets are calculated as:

Market value of investmentsPlus(+) current assets and other assetsPlus(+) accrued incomeLess(-) current liabilities and other liabilitiesLess(-) accrued expenses

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How frequently is the NAV calculated ?

All mutual funds have to disclose their NAVs daily, byposting it on the AMFI web site by 8.00 p.m.

Open ended funds have to compute and disclose NAVs

everyday; closed end funds can compute NAVs everyweek, but disclosures have to be made everyday.

Closed end schemes not mandatorily listed on the stockexchange can publish NAV according to the periodicity of 1month or 3 months, as permitted by SEBI.

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What are the initial issue expenses ?

Expenses that are incurred in the launch of the fund arecalled as initial issue expenses.

The costs of registration and fund formation

Legal and advisory expenses Costs of launching the scheme

Advertisement and promotion expenses

Distribution costs

Commissions to selling agents

SEBI imposes a ceiling of 6% on these expenses.

Can the Fund be launched without bearing any

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Can the Fund be launched without bearing anyinitial issue expenses ?

Yes

Such funds are called as no load funds

AMCs can charge an investment management fee, whichis 1% higher than the statutory limit, in this case.

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Latest changes on Initial Issue Expenses

IIE will be permitted for closed ended schemes only andsuch scheme will not charge Entry load

IN CES, IIE shall be amortized on a weekly basis overthe period of scheme.

IN OES, the sales, marketing and other expenses ofsales should be met from the entry load and not IIE

Wh t th i d b t l f d?

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What are the expenses incurred by a mutual fund?

Investment management fees to the AMC

Custodians fees

Trustee fees

Registrar and transfer agent fees

Marketing and distribution expenses

Operating expenses

Audit fees

Legal expenses Cost of mandatory advertisements & communications to

investors

Can the AMC charge all the expenses that it

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incurs, to the income of the fund ?

No. There are two levels of restrictions

At the first level only certain kinds of expenses, that areidentified as having been incurred for the conduct of thebusiness of the fund, can be charged to the fund.

The second level of regulation refers to the limit on the totalexpenses, that can be charged to the fund

Following is the maxmum limit on the expenses

For net assets up tp Rs. 100 Cr 2.50%

For the next Rs 300 Cr. Of net assets 2.25%

For the next Rs 300 Cr. Of net assets 2%

For the remaining net assets 1.75%

On debt funds the limits on expenses are lower by 0.25%

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What are the fees charged by the AMC ?

The fees are regulated by SEBI as follows: For the first Rs.100 Cr. Of net assets: 1.25%

For the net assets exceeding Rs. 100 Crore: 1.00%

If the AMC does not charge any of the initial issue

expenses to the fund, it can charge the scheme a

management fee, that is 1% higher than the above rates

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Numerical

Weekly Net average asset=1400 Cr.

What could be the maximum ongoing expenses.

On 1st 100 cr. 2.5% i.e. 2.5 Cr.

On next 300 Cr. 2.25% i.e. 6.75cr.

On next 300 Cr. 2% i.e. 6 Cr.

On Rest of the WNAS

(700 cr.) 1.75% i.e. 12.25 Cr.

Total 27.5 Cr.

T I li ti i M t l F d

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Tax Implication in Mutual Funds

Income earned by any mutual fund registered with SEBIis exempt from tax.( It is a trust) Under section 10(23 D)

The dividends are tax free in the hands of unitholders byit is liable to dividend distribution tax in case of closedended fund and debt funds( equity

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Capital Gain Taxation

The difference between sale and purchase price is known as capital gain /

loss. The sale and purchase of units in equity oriented scheme of MF is subject

to STT at the prescribed rate

Under Section 111 A of the IT ACT, STCG on sale of equity orientedscheme is taxed at the rate specified by the govt. ( currently10%). LTCG

LTCG if equity oriented scheme of MF is exempt from tax.

Tax on other scheme is 10% for LTCG ( without indexation) and 20% withindexation.

under section 54 of Income Tax Act, LTCG are exempt from tax if investedin specified bonds (54EC) issued by NABARD, NHAI, REC or specifiedequity (54ED) within 6 months of transfer of units

the bonds must be held for minimum 3 years and no loan be taken againstthese bonds and the equity must be held for minimum 1 year

Oth i t

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Other points

Section 80 C Individual and HUF are entitled to deduction uptoRs. 1 lakh in respect of payment out of taxable income towardscertain instruments which includes ELSS of Mutual funds.

Dividend Stripping ( Section 94(7) If investor buy units within 3months prior to record date of dividend and sells those units within3 months of record date, then the loss if any, shall be ignored.

Units are not considered under wealth tax

Section 195 20% TDS for LTCG and 30% TDS on STCG if unitholder is a NRI. 48% TDS if unit holder is foreign company.

N i l

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Numerical

An investor purchased units in an apporved MutualFund on Jan. 1, 1998 for Rs.500000/-. He sold the unitson December 1, 1999 for Rs. 750000/-. Calculate thecapital gain taxes paid by him. ( Ignore indexation).

Answer :

Long term capital gain = 250000/

So Tax on LTCG = 2500000* 10% = Rs. 25000/-

V l ti f S iti

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Valuation of Securities

Non Performing Assets (NPA)An asset shall be classified as an NPA, if the interest

and/or principal amount have not been received or haveremained outstanding forone quarter, from the day

such income/installment has fallen due.Such assets will be classified as NPAs, soon after the

lapse of a quarter from the date on which paymentswere due.

V l ti f E it S iti

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Valuation of Equity Securities

Closing price on valuation date

Selected stock exchange

Use of alternate stock exchange quote

On the basis of earliest previous quote (not more than30 days prior to valuation date).

If trading is suspended up to 30 days, last quoted price;if it is suspended for more than 30 days, AMC/Trustee

decide valuation norms and document such norms.

Thi l t d d E it S iti

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Equity and equity related security

Rs. 5 lakhs or less OR less than 50000 shares in amonth

For unlisted: AMC need to make its own judgement andguideline - which need to be documented

Aggregate of illiquid securities - non traded, thinlytraded, and unlisted equity shares should not exceed15% if the total assets of the scheme and any assetsabove that limit will be valued at zero.

If no Trade done during the past thirty days then has tobe treated as non traded security and the Valuation isdone on basis of Good Faith

Thinly traded Equity Securities

Valuation of Thinly Traded Equity

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Valuation of Thinly Traded Equity

Networth per share

Earnings capitalisation value

Discount the industry P/E by 75%

Average of the two methods

10% discount for illiquidity

Earning capitalisation is zero if

EPS if negative

Accounts not available for9 months after closing date.

If illiquid securities are more than 5% of the portfolio, independent

valuation to be done

Valuation of Debt Securities

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Valuation of Debt Securities

Valuation of a Thinly Traded Security (

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Unit Capital is found in the Liability side of schemes balance sheet.

The Capital of a scheme includes Unit Capital, Reserves andBorrowings. It does not include the Networth of the AMC.

In Mutual Fund investors subscriptions are accounted for as Unit

Capital.

Investment made by Mutual fund on behalf of investors areaccounted as Assets.

Liabilities in Balance sheet of mutual fund are strictely short term in

nature.

The Day on which NAV is calculated is known as Valuation Date.

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Investor Plans and Services

Chapter 7

Investment lans

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Investment lans

Broadly 2 options- Growth option and Dividend Option

Automatic Reinvestment Plans Reinvestment of amount ofdividend made by fund in the same fund and receive additionalunits. It gives Benefit of Power of Compounding.

Systematic Investment Plans( SIP) For regular investment

Systematic Withdrawal Plan ( SWP) For regular income ( it is notsimilar to MIP)

Systematic Transfer Plan ( STP) Transfer on a periodic basis aspecified amount from one scheme to another within the same fund

family.

SIP and VAP

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SIP and VAP

SIP is investing a fixed sum periodically in a disciplinedmanner for long term. It gives benefit of Rupee Costaveraging ( Discussed in later half of presentation).

VAP is modified version of SIP. It is VoluntaryAccumulation Plan. It allows the investor flexibility withrespect to the amount and frequency of investment.

In VAP, investor has to impose voluntary self discipline.

Other Investment Services

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Other Investment Services

Telephone / Internet Transactions.

Cheque writing usually for liquid funds.

Periodic statements and Tax Information

Loans against units MF DOES NOT GIVES LOANSbut banks can give against units held by unit holder.

Nomination and Transfer by unit holders.

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Investment Management

Chapter 8

Equity ortfolio Management

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Equity ortfolio Management

Equity funds can invest into equity shares, preferenceshares, warrants or convertible debentures.

As on march 2004, indian stock exchanges have over9400 listed companies.

BSE has 7200 listed and 2600 of them are activelytraded securities.

Mutual Funds total sales and purchase exceeded Rs.70000 crores during 2003-2004.

What are large-cap and small cap shares?

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What are large cap and small cap shares?

The size of a company in the equity markets is determinedby market capitalisation= (no. of shares issued * marketprice/share)

Large Cap Small Cap

arket capitalisation hi h arket apitalisation o

reater iquidity oor iquidity

omparati ely sm aller returns omparat i ely hi her returns

os t of trans ac tion lo os t of trans ac tion hi h

Equity stocks can be classified as large cap, mid cap and small cap

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Equity stocks can be classified as large cap, mid cap and small cap

Market cap = Market Price per share X No of shares outstanding

Large cap stocks are traded everyday in large volumes; hencehighly liquid but these are established companies offering normalprofit potential

Small cap stocks provide higher return potential but are generallynot very liquid

Cyclical stocks are those whose performance is closely linked to

macro economic factors; eg. cement stocks which are linked toinfrastructure development in the country

The P/E ratio (Market Price Per Share / Earnings Per Share)indicates the price the market is willing to pay per rupee ofcompanys earnings (or potential earnings)

Higher P/E ratio indicates growth stock; value stocks have generallylower P/E ratios

P/E ratio reflects overvaluation and under valuation

What is dividend yield?

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What is dividend yield?

Dividend paid is usually a percentage of face value of the

share

Dividend Yield= dividend paid/market price of a share

What is the relationship between dividend yield?

Both the measures are sensitive to market price per share

If market prices are higher, P/E multiple will be higher, butdividend yield will be lower and vice versa

Classifications of Stocks

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Classifications of Stocks

Cyclical Stocks Whose earnings are correlated with

the state of the economy . Have relatively lower PE

ratios and higher dividend payouts.

Growth Stocks Stocks having potential for higherearnings. High PE and low Dividend yields

Value stocks Companies in mature industries and areexpected to yield low growth in earnings. Good assetsvalue. Currently under valued but can yield superiorreturns later.

What is active equity fund management

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What is active equity fund management

Fund manager tends to look at specific attributes in selecting stocks.

Active fund manager believes, that his ability to buy right stock at theright time, can translate into superior performance for his portfolio.

What are the basic active equity fund management style?

Growth Investment style ( objective is to capital appreciation,look for companies that are expected to give above averageearnings growth, The shares are more risky and thus expected tooffer higher returns over a long investment horizons.

Value Investment Style Look for companies that are currentlyundervalued but whose worth will be recongnized eventually. ( eg.Privatization/buy back)

What is passive equity fund management?

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Fund manager believes, that holding a well diversifiedportfolio is the cost efficient way ,to better returns, he wouldtend to mimic the market index.

It requires limited research and monitoring costs and istherefore cheaper.( The Expenses are low)

Fund manager may choose to mimic a index, or a subsetof the index or choose a basket of shares from multipleindices.

A passive fund manager has to rebalance his portfolio

every time changes are made in the index.

What is passive equity fund management?

What is the types of equity research done in MF?

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yp q y

Fundamental analysis Future earnings and riskprofile considered ( whether to buy or not) FundamentalAnalysis is the analysis of the profit potential of a company, based onnumbers relating to its products, sales, costs, profits and management of

the company

Technical analysis Study of historic data on thecompanys share price movements and volume (WHENTO BUY) Technical Analysis is the analysis of the market prices andtrading volumes data to identify clues to market assessment of a stock

Quantitative analysis Equity valuation and evaluatethe market as a whole

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Important

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Index

Debt instruments are issued by government, corporate

or banks

Debt instruments have fixed interest, floating interest orzero interest or coupon i.e. on a discounted basis

Debt markets are wholesale markets and investors arelarge institutional investors, such as banks, insurancecompanies, mutual funds and corporate due to largeticket sizes

More than 90% of trading in debt markets is ingovernment securities

Instruments in Indian Debt Market

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Instruments in Indian Debt Market

Certificate of Deposit Issued by Commercial banksand maturity of91 days to 1 year.

Commercial Paper Issued by corporate bodies andmaturity varies between 3 months and 1 year

Corporate Debentures

Floating Rate Bonds

Govt. Securities.

Treasury Bills Issued through RBI by GOI. Tenure is91 days and 364 days.

Bonds

What is real rate and nominal rate?

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What is real rate and nominal rate?

Nominal rate of interest is the rate that is paid to us by the

borrower

The real rate is the nominal rate less the rate of inflation.

Yield is the term used to signify the actual rate earned on

an investment.

Current yield is the ratio of coupon amount to market price

of a bond. If coupon = 8%, Market Price = 105, then current

yield of bond is 8/105 = 7.62%.

Important points

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p p

Principal or Par or Face Value the amount representing the

principal borrowed and the rate of interest is calculated on thissum. This is the amount payable on redemption

Coupon the interest paid periodically to the investor

Maturity the date on which the bond is redeemed. Term tomaturity or tenor is the period remaining for the bond to mature

Put option refers to the option given to the investor to sell(redeem) the bond before maturity; investor may exercise theoption when interest rates go up, above coupon in the market

Call option refers to the option to the borrower to buyback(repurchase) before maturity; issuer may exercise the optionwhen interest rates fall below the coupon rate

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Risks in Investing in Bonds

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g

Interest Rate Risk

Reinvestment Risk

Call Risk ( The issuer may call back)

Default Risk Inflation Risk

Liquidity Risk

Yield Spreads

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p

Yield Spread = Yield of benchmark security yield of aparticular bond

It is the risk premium paid by the bond to induce investor

Higher the credit rating, higher the safety and so lower

the yield spread

SO if a bond is downgraded, the yield spread will widen.

Term to Maturity It is period until the bonds maturity

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What is the relationship between the price

d th i ld f th b d ?

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Yield Curve :Rates at which bonds of similar risk of various tenorsare traded on a given point in time, are plotted in a

graph. This is known as the Yield Curve

Price and Yield are inversely related.

Changes in interest rate impact bond values in theopposite direction.

Yield also gets increased by downgrading of creditrating of the bond.

and the yield of the bond ?

What are the various types of fixed income

securities available in the Indian Market?

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securities available in the Indian Market?

Issuer Instrument Maturity Investors

Central Govt.

Dated

Securities 2- 30 Years

RBI, Banks , Insurance

Companies, Provident funds,

Mutual Funds , Primary

Dealers

Central Govt. T-Bills 91/364 days

RBI, Banks , Insurance


Mutual Funds , Pd's,

Individuals

Stare Govt.DatedSecurities 5-10 Years

Banks, InsuranceCompanies, Provident funds

PSU's

Bonds,

structured

Obligations 5-10 Years

Banks, Insurance


Mutual Funds, Individuals

Corporates Debentures 1-12 Years

Banks, Mutual Funds,

Corporates, IndividualsCorporates,

Primary

Dealers

Commercial

Paper

3 months - 1

Year

Banks, Corporate, Financial

Institutions, Mutual Funds,

Individuals

Banks

Certificates of

Deposit

3 months - 1

Year Banks , Corporates

Restrictions

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Mutual funds can invest only in marketable securities

All investments are on delivery basis, no squaring off.

A MF under all its schemes cannot hold more than 10% of the paid upcapital of a company.

A MF scheme can invest max. 10% of its NAV in a single company.(Exception Index and Sectoral funds)

Debt funds - single issuer not more than 15% of NAV, can be relaxed to20% with approval of trustees and AMC

MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $ 50million, whichever is lower.

Funds of 1 scheme can be invested in any other MF ( Max 5% of Net

Assets) Maximum investment in unlisted shares is 10% of NAV forClosed

ended schemes and 5% for Open ended schemes.

Inter Scheme Transfer

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Such transfers happen on a delivery basis, at marketprices.

Such transfers should not result in significantly alteringthe investment objectives of the scheme involved.

Such transfer should not be of illiquid securities, asdefined in the valuation norms.

One scheme can invest in another scheme, up to 5% ofnet assets, No fee is payable on these investments.

Investment in SponsorCompany

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A mutual fund scheme cannot invest in unlistedsecurities of the sponsor or an associate or groupcompany of the sponsor.

A mutual fund scheme cannot invest in privately placedsecurities of the sponsor or its associates.

Investment by a scheme in listed securities of thesponsor or associate companies cannot exceed 25% ofthe net assets of the scheme

New rovisions on Investment olicy

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Minimum Number of Investors per scheme

Purpose of MF is sharing the risks with a large number ofinvestors.

SEBI requires each scheme to have a minimum numberof investors.

So now each scheme and individual plan under thescheme should have a minimum number of 20 investorsAND no single investor should account for more than25% of the corpus of such scheme.

OES are allowed three months or upto end of thesucceeding calendar quarter from the close of IPO toensure compliance with this requirement

Fund of Funds Scheme

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A FoF invests in the schemes of other MF.

A normal MF scheme cannot invest in any FoF scheme.

A FoF scheme cannot invest in another FoF scheme.

A FoF is not allowed to invest its assets other than inschemes of MF, except to the extent of its liquidityrequirements.

Important points

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The current market price of a 9% coupon bond, whenother bonds of similar maturites pay 11% will be ---Below Par.

Yield and price move in opposite direction

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Chapter 9

Measuring And Evaluating Mutual

Fund Performance

E i b ith di id d it l i

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Earnings can be either dividend or capital gains.

The methods for measuring mutual fund returns are:

Percent change in NAV Simple total return

ROI or total return with dividend re-investment

CAGR Method

Rate of Return = Income Earned *100/ Amount invested. Simple total return (STR) method includes the dividends paid to the investor

STR = {NAV(end) NAV ( begin)}+ Dividend paid *100NAV at beginning

Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, thenmoney will double in 72/12 = 6 years.

Performance Measurement

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Change in NAV= ( NAV at end NAV at beg.)*100

NAV at the beginning

Total Return = ( Change in NAV+ Dividend) *100 NAV at beg.

Return on investment or Total Return with dividend reinvested at NAV.

Portfolio Turnover Rate It measures the amount of buying and selling of securitiesdone by the fund. It is lesser of assets purchased or sold divided by the funds netassets.

A 100% turnover implies that the manager replaced his entire portfolio during theperiod in question

200% means portfolio changed in 6 months

A liquid fund has the highest portfolio turnover.

Numerical

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An open ended fund was purchased when its NAV wasRs. 22. One year later, its NAV was Rs. 24. Theannualised percent NAV change is ______

Answer

- % change in NAV = ( 24 -22)*100 = 9.09% 22

Purchase price Rs. 22 per Unit

NAV at year end Rs. 23 per Unit

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Interim Div. Rs. 3

Ex.-Div. NAV Rs. 21

Total Return=?

Assume investment of Rs. 10000

Step 1: Initial Units alloted =10000/22=454.55

Step 2:Total Div.=454.55*3=1363.65

Step 3: Additional Units=1363.65/21=64.94

Step 4:Total Units=454.55+64.94=519.49

Step 5:Withdral Amt. =519.49*23=11947.17

Gain =11947.17-10000=1947.17

Gain of 1947.17 on the investment of Rs. 10000

So that on the investment of Rs. 100 gain is 19.47

Ans:19.47%

Other performance measures

Th ti ( R ti f t t l t t t f th

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The expense ratio ( Ratio of total expenses to average net assets of thefund)- Funds with small corpus size will have a higher expense ratio

affecting investor returns. It is indicator of the Funds Efficiency andCost Effectiveness.

The income ratio ( It is the net investment income divided by its netassets for the period) useful for debt fund

Portfolio Turnover rate

Fund size Small funds are easy to manage and can achieve their

objectives in a focussed manner with limited holdings.

Large funds benefit from economies of scale with lower expense

ratios and superior fund management skills.

Cash holdings

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Benchmarking

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Benchmarking should be selected by reference to The

asset class it invests in and the funds stated investmentobjective.

3 kinds of benchmarks are used Relative to marketas a whole, relative to other mutual funds, and

relative to other comparable financial products. For debt funds, the benchmark should have the same

portfolio composition and the same maturity profile

Main benchmark for debt funds is I-sec

Tracking Error Applicable for Index Fund

Criteria for peer group comparisons

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p g p p

The investment objective and risk profiles of the twofunds should be the same.( Debt with debt and equitywith equity)

Portfolio composition of two funds is similar. ( Gilt cannot

be compared with riskier corporate debt)

Fund size should be comparable.( same size)

Expense Ratios is also important factor

Funds should be compared over the same periods only

Important Point

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The Credit Rating Agency CRISIL evaluates the

Fund Performance and Ranks the Scheme by

Performance.

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Helping Investors with financialplanning

Chapter 10

Definition and objective of FP

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It is identifying all the financial needs of an individual

Translating needs to monetarily measurable goals

Planning financial investments that will allowindividual to provide for and satisfy his future financial

needs and achieve his lifes goals.

The objective is to ensure that right amount of money isavailable in the right hands at the right point in futureto achieve an individuals financial goals.

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Benefits of Financial Planning

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Financial Plans are tax efficient.

It provides direction and meaning to financial decisions.

It allows one to understand how each financial decision one makesaffects other areas of ones finances.

Benefits to Financial Planner

Ability to establish long term relationships ( Multiple products toone client)

- Financial Planner should ideally link his rewards and fees to

the clients financial success and achievement of the financialgoals.

Ability to build a profitable business ( NO rebating)

Qualities of a Good Financial Planner

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Building trust with the client

Good knowledge of Financial products

Familiarity with taxation and estate planning issues

Understanding of stages of clients life and wealth cycle and assetallocation

Independent judgement and balanced thinking Organized way of working

Regular contact with clients

Clear Focus on Overall Financial Planning of client rather than onindividual transactions.

The basis of genuine advice should be Financial planning to suit theinvestors advice.

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Important responsibilities of investors in the

financial planning exercise?

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Should set measurable financial goals.

Should understand the impact of financial decisions on their cash

flows and their income.

Should be willing to revise and re-balance their portfolios with

changing market conditions, performance and their changing needs

and changes in lifestyle or circumstances( inheritance, marriage,

birth, house purchase or change of job status)

Investors benefit immensely by starting early and being systematic

and disciplined in their approach.

Very important points on financial planning

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The planner can look at all the clients need including budgeting,

saving, taxes, investments, insurance and retirement planning. A financial planner can link his own rewards and fees to the clients

financial success and the achievement of their financial goals

MUTUAL FUND IS THE MOST IMPORTANT TOOL FORFINANCIAL PLANNING.( CORE PRODUCT)

Financial is not only investing. It comes before investing. It is relevant for all category of clients.

It is not as same as retirement planning.

It is not only Tax Planning.

Financial planning is important at younger stage of life.

Important points on Financial Planning

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The basis of genuine investment advice should be

financial planning to suit the investors situation. Itshould not be current market condition.

Financial Planning allows a person to achieve financialgoals through proper management of finances.

Financial planners and their clients should focus onallocating funds to different asset classes.

Financial planning is relevant not only to HNIs

Financial planning works better for younger/ middleaged client.

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Chapter 11

Recommending Financial PlanningStrategies to Investors

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FINANCIAL PLANNING STRATEGIES

Harness the Power of Compounding 1% interest per month isbetter than 12% yearly retrun.

Buy and hold is most common strategy BUT most common mistake.Ideally it should be, track your investments, discard the nonperformers and keep the good performers.

Rupee cost averageing

Value Averaging.

Jacobs Rebalancing Strategy ( Combination of RCA and Valueaveraging strategies- Using a aggressive growth fund and liquid

fund of the same family.) ( putting regularly money in liquid fund andset a target value for the equity fund)

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Buy and hold strategy may not be a beneficial strategy becauseinvestors may not weed out poor performing companies and investin better performing companies

Rupee Cost Averaging (RCA) is a technique that involves:

Fixed amount invested at regular intervals

When NAV is down, more units are bought and when price ishigh, fewer units are bought

Over a period of time, the average purchase price of theinvestors holdings will be lower

Investors use the SIP or AIP to implement RCA

Disadvantage: RCA does not tell when to sell or switch from onescheme to another.

Rupee Cost Averaging (RCA)

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Month#

Amount

Invested(Rs) NAV (Rs)

No of unitsbought

Cumulative

No ofunits

Value of

Holding(Rs)

1 1000 10.00 100.00 100.00 1,000.00

2 1000 12.50 80.00 180.00 2,250.00

3 1000 14.25 70.18 250.18 3,565.00

4 1000 11.75 85.11 335.28 3,939.56

5 1000 10.50 95.24 430.52 4,520.46

6 1000 9.00 111.11 541.63 4,874.68

7 1000 8.50 117.65 659.28 5,603.86

8 1000 7.65 130.72 790.00 6,043.48

9 1000 8.80 113.64 903.63 7,951.97

10 1000 9.25 108.11 1,011.74 9,358.61

11 1000 12.00 83.33 1,095.07 13,140.90

12 1000 15.00 66.67 1,161.74 17,426.12

Average Cost 12000/1162= 10.33

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Value Averaging (VA) involves: A fixed amount is targeted as desired portfolio value at regular intervals

If market has moved up, the units are sold and the target value isrestored

If market moves down, additional units are bought at the lower prices

Over a period of time, the average purchase price of the investorsholding will be lower than if one tries to guess the market highs andlows

VA is superior to RCA because it enables the investor to book profits andrebalance the portfolio

Investors can use the systematic withdrawal and automatic withdrawal planto implement value averaging

Investors can also use an equity and a money market mutual fund toimplement value averaging.

Value Averaging

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Month

#

TargetValue

(Rs) NAV (Rs)

Value of

Holding Units to invest

Cumulative no

of units

1 1000 10.00 100.00 100.00 100.00

2 2000 12.50 1,250.00 60.00 160.00

3 3000 14.25 2,280.00 50.53 210.53

4 4000 11.75 2,473.68 129.90 340.435 5000 10.50 3,574.47 135.76 476.19

6 6000 9.00 4,285.71 190.48 666.67

7 7000 8.50 5,666.67 156.86 823.53

8 8000 7.65 6,300.00 222.22 1,045.75

9 9000 8.80 9,202.61 (23.02) 1,022.73

10 10000 9.25 9,460.23 58.35 1,081.08

11 11000 12.00 12,972.97 (164.41) 916.67

12 12000 15.00 13,750.00 (116.67) 800.00

Some Key concepts of Financial Planning

When to invest when they have money to invest

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When to cash out

When the goals have arrived and clients need the money for thepurpose for which they have invested

IF the overall market appears overvalued in terms offundamentals and historic valuations

Start planning and investing regularly

Have realistic expectations

Invest Regularly

The Strategy advisable for an investor to maximise investmentreturn in long run is Switch from poor performers to Goodperformers.

Asset allocation refers to deciding the composition of the portfolio in

Asset Allocation

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Asset allocation refers to deciding the composition of the portfolio interms of debt, equity and money market segments

Asset allocation differs from investor to investor and depends upontheir situation, their financial goals and risk appetite

The asset allocation for an investor depends upon his life andwealth cycle stage

A model portfolio creates and ideal approach for an investorsituation and is a sensible way to invest.

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Investors can have 2 approaches:

Fixed asset allocation

Flexible asset allocation

Fixed asset allocation means

maintaining the same ratio between various components of the portfolioi.e. being disciplined

Re-balancing the portfolio in a disciplined manner

Periodical review and returning to original allocation

If value of equity component increases, investor books profits

Flexible asset allocation means

Allowing the portfolio profits to run, without booking them

If equity market appreciates, it results in higher proportion in equity thandebt.

Asset Allocation The Strategic Tool

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Allocation of money between equity, debt and money

market instruments.

Depends upon situations, financial goals and riskappetite.

Benjamin Graham advocates 50/50 split betweenequities and bond . But Bogle suggests differentcombinations.

Different Combinations suggested by Bogle

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Basic Managed Portfolio - 50% in diversifed Equity Value Funds,

25% in a Govt. Securities Fund and 25% in High gradeCorporate Bond Fund.

Basic Indexed Portfolio 50% in Total Stock market index and50% in a Total Bond market portfolio

A Simple Managed Portfolio 85% in Balanced fund and 15% inmedium Term bond fund

A complex Managed Portfolio 20% in Diversified Equity fund,20% in Aggressive Growth fund, 10% in speciality fund, 30% in

long term bond funds and 20%

in short term bond fund A readymade portfolio Single index fund with 60/40

equity/bond holdings.

What is Bogles strategic asset allocation?

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Older investors in the distribution phase:

- 50% equity : 50% debt

Younger investors in the distribution phase:


Older investors in the accumulation phase:


Younger investors in the accumulation phase:


Ch t 12

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Chapter 12

Selecting the right InvestmentProducts for Investors

Physical Assets include gold and real estate and traditionally very popular

Gold is not subject to value erosion on account of rupee depreciation

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Gold is perceived as a hedge against inflation

Gold-linked unit schemes from mutual funds in India are underway

Real estate requires a high capital investment and may not be easy toliquidate at the appropriate price

Some fund houses are preparing to launch Real estate mutual funds inthe near future

Financial assets include equity, debt and money-market instruments

Equity, debt and money market instruments are direct investments withthe borrower/ issuer of securities

Mutual funds represent an indirect investment through an intermediary.

Products by issuer:

Bank deposits

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Offer high liquidity and perceived safety

Low or negligible returns after factoring inflation and tax

Corporate

Equity

Issued publicly and listed

Issued privately and unlisted

Investors may acquire shares either at the time of IPO or secondary (stock) market

Equity offers high growth potential and liquidity The challenge is to identify the right shares that are likely to appreciate

Requires capital to build a diversified portfolio.

The Listing of shares at Stock Exchange ensures High Liquidity as you can traderegularly to sell your shares.

Debt

Debentures issue a fixed rate of interest

Debent res are sec red b the assets of the borro er

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Debentures are secured by the assets of the borrower

Debentures are provided rating by credit-rating agencies Bonds are also generally provided rating by independent

agencies

Creditworthiness of borrower and risk of default have to beanalyzed before investing in these bonds and debentures

Company fixed deposits carry a higher interest rate and areunsecured

These would also have tax implications.

The Rate of interest paid by a company on debentures issued byit depends on the Companys Credit rating.

The most important factor to look for when investing in acorporate fixed deposit is the Credit Rating of the deposit.

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Indira and Kisan Vikas Patra

Introduced as post office scheme to tap savings in

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Introduced as post office scheme to tap savings inrural India

Very popular with urban investors also

Current yield is 8% over 6 years, fully taxable

IVP permits cash investment and protection of identity Easily transferable and liquid.

RBI Relief Bonds

Issued by RBI on behalf of the Government of India

A 5-year investment product with 8% interest offering

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y p g

Interest is currently taxable (used to be tax-free earlier)

Free of risk of default

Government Securities

Long-term government paper

Risk-free government obligation

Low-return and define the benchmark rate of return on the yield curve

Specially appointed Primary dealers deal in G-Secs

Generally high ticket investments

Best accessible to small investors through mutual funds.

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A comparison of investment products can be done on risk, return,volatility and liquidity

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Mutual funds combine the advantages of all investment vehicles while

doing away with their shortcomings The returns in a mutual fund are adjusted for market movements.

In India, Individual Investors does not direct access to MoneyMarket Instruments.

The biggest advantage of Investment in Gold is hedge againstinflation.

The biggest disadvantage of investment in Real estate is HighPurchase Price. You have to invest huge amount.

Th

e advantage of bank deposits is liquidity,h

igh

perceived safetyand low entry price. ITS disadvantage is low Yield after TAX.

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Jacobs recommendations of portfolios based onrisk level of different funds

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Low Risk ( conservative) portfolio :

50% Gov. sec. fund + 50% Money market fund.

Moderate Risk ( cautiously aggressive) portfolio:

40% growth and income fund+ 30% govt. bond fund+ 20% Growth fund + 10% index funds

High Risk( Aggressive) portfolio :

25% aggressive growth fund+ 25% internationalfunds + 25% sector funds +15% high yield bondfunds+ 10% gold funds

Evaluating the Risks of a Mutual Fund

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What is Risk ?

Risk means the possibility of financial loss.

Risk is thus equated with Volatility of Earnings

Equity Price Risk

Company Specific

Sector Specific

Market Level

Volatility of an Equity mutual fund comes from:

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Kind of stocks in the portfolio ( growth/value/big/small)

The number of stocks ( degree of diversification)

Smaller portfolios are more volatile than large PFs

Fund managers success at market timings

It is independent of number of investors in the scheme.

The Risk tolerance of an investor is dependent on his age, his

income and his job security. Risk Tolerance is independent of the Stock Market Movements.

Evaluating the Risks of a Mutual Fund

M k t C l

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Market Cycles

Risk Measures

Standard Deviation SD measures the fluctuations of a fund`sreturns around a mean level.

Disadvantage of SD is that it is based on Past Returns.

Beta Coefficient Beta relates a fund`s return with a marketindex and measures the sensitivity of the fund`s returns tochange

AMFI_PPT

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